How startups fill the gap between revenue and investment

I get tons of inbound from entrepreneurs and founders, from first-timers with an idea to CEOs with millions in annual revenue, and they all ask what basically boils down to the same question:

“I’ve taken my startup this far, how do I get the money to take it to the next level?”

In 20 years of building companies, roughly half of our companies have taken some form of investment to go after a much larger payoff than our existing revenue would allow. It wasn’t something we celebrated, it was something we felt was mandatory. In other words, there was no other way and outside funding became our best hope.

When you have revenue and you chase funding, you should know what you’re getting into and you should exhaust every other avenue before you decide that someone else’s money is a better bet than your customers’ money. 

Remember: the easier the path, the lesser the payoff. 

The easiest path: venture capital funding

I know it’s heresy to talk about how easy it is to raise money. It’s actually not, and I’ll be the first to admit it: your odds are poor, it’s going to take all your time and energy, and you’re going to be beholden to a bunch of people who have a different vision of your idea than you do.

But if you need scale money, this is the only shortcut.

Now, I say “scale money” because you should only be seeking VC money to scale your business, not establish it. The odds of getting funded for an idea with no current revenue and no current growth are infinitesimally slim. 

So let me start with some truth for the earliest of early-stagers. You’re going to have to walk a harder path, so keep reading.

If you do have revenue, the first thing you have to show a VC associate, the gatekeeper of the firm, is how your existing revenue is going to grow 10x to 100x over the next three to five years. This is standard VC math. 

I’ll leave it to others to debate the logic and/or fairness of the process. My point is that you can put any multiplier you want on zero revenue and the result will still be zero. Even if you’ve got $1,000 in monthly revenue, then that’s about $10,000 in annual revenue, and at best, at 100x, the investor is thinking you might be worth $1 million if all the stars align. 

Most VCs won’t touch a valuation that low unless you’ve got a track record. If you don’t, you’re kind of wasting your time putting a deck together. 

Don’t waste your time. Your startup is probably better than that. You just need to prove it.

The not-so-easy-path: find a rich person

In the shadow of Amazon and Microsoft, Seattle startups are having a moment

Venture capital investment exploded across a number of geographies in 2019 despite the constant threat of an economic downturn.

San Francisco, of course, remains the startup epicenter of the world, shutting out all other geographies when it comes to capital invested. Still, other regions continue to grow, raking in more capital this year than ever.

In Utah, a new hotbed for startups, companies like Weave, Divvy and MX Technology raised a collective $370 million from private market investors. In the Northeast, New York City experienced record-breaking deal volume with median deal sizes climbing steadily. Boston is closing out the decade with at least 10 deals larger than $100 million announced this year alone. And in the lovely Pacific Northwest, home to tech heavyweights Amazon and Microsoft, Seattle is experiencing an uptick in VC interest in what could be a sign the town is finally reaching its full potential.

Seattle startups raised a total of $3.5 billion in VC funding across roughly 375 deals this year, according to data collected by PitchBook. That’s up from $3 billion in 2018 across 346 deals and a meager $1.7 billion in 2017 across 348 deals. Much of Seattle’s recent growth can be attributed to a few fast-growing businesses.

Convoy, the digital freight network that connects truckers with shippers, closed a $400 million round last month bringing its valuation to $2.75 billion. The deal was remarkable for a number of reasons. Firstly, it was the largest venture round for a Seattle-based company in a decade, PitchBook claims. And it pushed Convoy to the top of the list of the most valuable companies in the city, surpassing OfferUp, which raised a sizable Series D in 2018 at a $1.4 billion valuation.

Convoy has managed to attract a slew of high-profile investors, including Amazon’s Jeff Bezos, Salesforce CEO Marc Benioff and even U2’s Bono and the Edge. Since it was founded in 2015, the business has raised a total of more than $668 million.

Remitly, another Seattle-headquartered business, has helped bolster Seattle’s startup ecosystem. The fintech company focused on international money transfer raised a $135 million Series E led by Generation Investment Management, and $85 million in debt from Barclays, Bridge Bank, Goldman Sachs and Silicon Valley Bank earlier this year. Owl Rock Capital, Princeville Global,  Prudential Financial, Schroder & Co Bank AG and Top Tier Capital Partners, and previous investors DN Capital, Naspers’ PayU and Stripes Group also participated in the equity round, which valued Remitly at nearly $1 billion.

Up-and-coming startups, including co-working space provider The Riveter, real estate business Modus and same-day delivery service Dolly, have recently attracted investment too.

A number of other factors have contributed to Seattle’s long-awaited rise in venture activity. Top-performing companies like Stripe, Airbnb and Dropbox have established engineering offices in Seattle, as has Uber, Twitter, Facebook, Disney and many others. This, of course, has attracted copious engineers, a key ingredient to building a successful tech hub. Plus, the pipeline of engineers provided by the nearby University of Washington (shout-out to my alma mater) means there’s no shortage of brainiacs.

There’s long been plenty of smart people in Seattle, mostly working at Microsoft and Amazon, however. The issue has been a shortage of entrepreneurs, or those willing to exit a well-paying gig in favor of a risky venture. Fortunately for Seattle venture capitalists, new efforts have been made to entice corporate workers to the startup universe. Pioneer Square Labs, which I profiled earlier this year, is a prime example of this movement. On a mission to champion Seattle’s unique entrepreneurial DNA, Pioneer Square Labs cropped up in 2015 to create, launch and fund technology companies headquartered in the Pacific Northwest.

Boundless CEO Xiao Wang at TechCrunch Disrupt 2017

Operating under the startup studio model, PSL’s team of former founders and venture capitalists, including Rover and Mighty AI founder Greg Gottesman, collaborate to craft and incubate startup ideas, then recruit a founding CEO from their network of entrepreneurs to lead the business. Seattle is home to two of the most valuable businesses in the world, but it has not created as many founders as anticipated. PSL hopes that by removing some of the risk, it can encourage prospective founders, like Boundless CEO Xiao Wang, a former senior product manager at Amazon, to build.

“The studio model lends itself really well to people who are 99% there, thinking ‘damn, I want to start a company,’ ” PSL co-founder Ben Gilbert said in March. “These are people that are incredible entrepreneurs but if not for the studio as a catalyst, they may not have [left].”

Boundless is one of several successful PSL spin-outs. The business, which helps families navigate the convoluted green card process, raised a $7.8 million Series A led by Foundry Group earlier this year, with participation from existing investors Trilogy Equity Partners, PSL, Two Sigma Ventures and Founders’ Co-Op.

Years-old institutional funds like Seattle’s Madrona Venture Group have done their part to bolster the Seattle startup community too. Madrona raised a $100 million Acceleration Fund earlier this year, and although it plans to look beyond its backyard for its newest deals, the firm continues to be one of the largest supporters of Pacific Northwest upstarts. Founded in 1995, Madrona’s portfolio includes Amazon, Mighty AI, UiPath, Branch and more.

Voyager Capital, another Seattle-based VC, also raised another $100 million this year to invest in the PNW. Maveron, a venture capital fund co-founded by Starbucks mastermind Howard Schultz, closed on another $180 million to invest in early-stage consumer startups in May. And new efforts like Flying Fish Partners have been busy deploying capital to promising local companies.

There’s a lot more to say about all this. Like the growing role of deep-pocketed angel investors in Seattle have in expanding the startup ecosystem, or the non-local investors, like Silicon Valley’s best, who’ve funneled cash into Seattle’s talent. In short, Seattle deal activity is finally climbing thanks to top talent, new accelerator models and several refueled venture funds. Now we wait to see how the Seattle startup community leverages this growth period and what startups emerge on top.

What founders need to know about pro rata rights

In the context of a term sheet, pro rata rights (or pro rata) govern whether investors may continue to invest in subsequent rounds of funding in proportion with their ownership. Investors with pro rata rights can invest in the company’s next round an amount that will allow them to maintain their ownership percentage.

This is an excerpt from the Holloway Guide to Raising Venture Capital, a comprehensive resource for founders of early-stage startups, covering technical details, practical knowledge, real-world scenarios, and pitfalls to avoid. Read our accompanying article about the company over on TechCrunch.  

In the context of a term sheet, pro rata rights (or pro rata) govern whether investors may continue to invest in subsequent rounds of funding in proportion with their ownership. Investors with pro rata rights can invest in the company’s next round an amount that will allow them to maintain their ownership percentage.

Pro rata is Latin for “in proportion.” Most people are familiar with the concept of prorating from dealing with landlords: if you’re entering into a lease halfway through the month, your rent may be prorated, where you pay an amount of the rent that is in proportion to your time actually occupying the property.

Almost all investors try to negotiate for pro rata rights, because if a company is doing well they want to own as much of it as possible. After all, why not double down on a winner than use that same money to invest in a newer, unproven company? In the 2018–2019 fundraising climate, though, it’s safe to say we’re at “peak pro rata.” Everybody wants pro rata, even those who don’t entirely understand how it works or affects companies.

Some founders include a major investor clause in the term sheet, which reserves certain rights and privileges to those they deem “major investors,” based on amount invested or number of shares purchased. Whether to grant pro rata rights to all investors or only those above a major investor threshold is a tricky decision for two reasons.

Seedlegals closes $4M Series A, led by Index Ventures, to automate startup fundraisings

When SeedLegals launched in 2017 in the UK, I’d say many of us thought “why has that not been done before?”. After all, two things have happened which make this an obvious idea for a startup: startup funding rounds are now so common that there is no reason large amounts of automation could be done. If you can buy a divorce online, surely you can organise funding rounds?

The second trend is the sheer level of automation happening in legal software today. After all, we now have “Uber for Lawyers” (Lexoo, Linkilaw, Lawbite) and AI-driven legaltech (KIRA, Luminance, ThoughtRiver). (Eventually, we will have blockchain smart contracts do ALL the work, but that’s for another time…).

So it’s not unsurprising that today SeedLegals announces it has closed a $4 million Series A led by venture capital firm Index Ventures (London/SF/etc) with participation from Kima Ventures (Paris/TelAviv), The Family (Paris) and existing investor Seedcamp (London).

SeedLegals says it now has 7,000 startups — capturing, it claims, 8% of all early-stage UK funding rounds — using its platform to manage the entire fundraising process and all related legal documents. The platform helps companies build and negotiate terms sheets, shareholder agreements, cap tables, stock option allocations, EIS approvals, hiring agreements, NDAs and more.

It also have two new products: SeedFAST and Instant Investment, which enable startups to quickly top up investment between funding rounds.

If UK companies created over 27,000 contracts on SeedLegals last year, the start-up reckons that saved them an estimated £4.5M in legal costs. Normally, lawyers create custom documents for each transaction. That means 18 weeks, on average, to complete a funding round, with legal fees starting at £3,000 for a simple seed round to £20,000 and up for each side for later-stage rounds.

The platform replaces spreadsheets and Word docs with a database-driven platform. You enter data once and the system uses pre-built knowledge, deal data and document automation to dynamically build all the outputs.

Anthony Rose, co-founder and CEO at SeedLegals, says they have removed the “complexity, unnecessary middlemen, standardized and automated the processes, and that has really resonated with both founders and investors.”

Hannah Seal from Index Ventures who joins the board with this round commented: “SeedLegals
is making the complex process of fundraising straightforward for everyone involved.

“We closed this round on SeedLegals and have been impressed with the speed and ease of use. For startups who spend thousands on legal fees on agreements that vary little from company to company, this is an absolute no-brainer.

SeedLegals was created by serial entrepreneur Anthony Rose, known in the tech industry for his work launching BBC iPlayer, and VC and angel investor Laurent Laffy, whose own portfolio includes consumer brands such as Graze and Secret Escapes .

Seed investor Gree Ventures makes first close of new $130M fund — and rebrands to Strive

There’s big news for one of India and Southeast Asia’s longest-running early-stage investors after Gree Ventures, the fund attached to Japanese gaming firm Gree, announced the first close of its third fund, which is targeted at $130 million.

Gree has been a fixture in Southeast Asia since 2012, but now the firm is rebranding to Strive (or “STRIVE” to quote the press release) for the new fund. Rebrandings often seem token, but, in this case, it makes a lot of sense to stop being called Gree (“GREE”) because the company is just one LP of many.

“People often confuse us as a single LP fund,” Nikhil Kapur — who has been promoted to partner — told TechCrunch in an interview. “But we’re quite independent from Gree, plus we’re not a corporate fund and we’re not investing in gaming.”

Indeed, in this case, the fund is talking to non-Japan-based LPs for the first time over potential participation. Confirmed LPs include past backers SME Support JAPAN — which is part of the Ministry of Economy, Trade and Industry of Japan — Gree itself and members of the Mizuho Financial Group. Opening the doors to prospective LPs in Southeast Asia is about adding “more local networks in these markets,” Kapur explained.

Those details, it is very much business as usual for Strive, which is putting the focus on B2B. Kapur said that 60-70 percent of past investments have tended to be on B2B deals, but now fund three is — for the first time — almost entirely dedicated to that segment.

Southeast Asia has seen some seed investors move further down the chain — Jungle Ventures’ new fund is targeting a $230 million final close, while Golden Gate Ventures’ third fund is $150 million while it also has a ‘growth fund’ aimed at $200 million — but Strive is sticking to early stage.

As seed funds go, $130 million is a lot but there’s plenty of nuance to that figure — it won’t all go to early-stage checks.

The fund is split across India, Southeast Asia and Japan — with around half of that allocation estimated for deals outside of Japan. That leaves around $25 million for ‘first checks.’ Kapur said that the outlined goal is to find 20 startups to back, and then double down on them with that follow-on capital. Interestingly, he said that there’s no hard allocation between the three focus regions and follow-on capital is allocated freely to those companies which are performing well and ready to grow, irrespective of geography.

The Strive team

Looking more closely at India and Southeast Asia, Kapur and investment manager Ajith Isaac pointed to increased synergies between the two regions. Indeed, large Southeast Asian players like Grab and Go-Jek have tapped India’s talent pool and located their R&D centers and engineering teams in the country, while Indian startups area increasingly foraying into Southeast Asia for market expansion.

“We see these regions not remaining separate in the near future… [and] becoming very intertwined,” Kapur said, pointing out that in venture capital firms like Accel and Lightspeed and following Sequoia India and investing directly in startups in Southeast Asia.

“The region will become very much interlocked and there’s a gap in people who can bridge it… that’s where we see a differentiated value-add on our side,” he added.

Southeast Asia itself has matured immensely since the Gree fund’s early days, but Kapur and Isaac — investment manager Samir Chaibi is the third member on the non-Japan side of the fund — maintain that there’s still “a gap in terms of institutional capital on seed stage” in some verticals where angel investors are helping new ventures get off the ground with first checks and early backing. That’s where the new Strive fund is keen to make its mark.

The fund, which has traditionally been very lean in terms of personnel, will also bulk up its own numbers. Kapur said he is hiring local teams in India and Indonesia with a viewing to growing the non-Japanese headcount to six people by the end of the year.

Dakar Network Angels begins startup investments in francophone Africa

The Dakar Network Angels network launched this month, making its first investment in francophone Africa to cleantech venture Coliba. The Ivorian startup—that uses a mobile app to coordinate waste recycling—will receive mentorship and a minimum of $25K in seed funds.

The deal is part of Dakar Network Angels’ mission of convening experts and capital to bridge the resource gap for startups in French speaking Africa—or 24 of the continent’s 54 countries.

The group—which goes by DNA for short—will offer seed fund investments of between $25K to $100K to early stage ventures with high growth potential. These rounds will come with the entrepreneurial guidance of DNA’s angel network.

Launched in Senegal, the organization’s founder is Marieme Diop, a VC investor at Orange Digital Ventures.

Speaking to TechCrunch, Diop underscored VC disparities between francophone and non-francophone Africa as the primary driver for launching DNA. She pointed to funding data by Partech indicating that 76 percent of investment to African startups goes to three English speaking countries—Nigeria, Kenya, and South Africa.

Of the $1.1 billion in equity funding to African tech ventures in 2019, only $54 million—or .05 percent—went to startups in French speaking countries, per Partech’s latest report.

“With DNA we want to develop first an ecosystem of resources…for the francophone Africa region…that entrepreneurs can tap into for scaling. We also want to position DNA as the first investment academy that will educate…on…methods for investing, mentoring, conducting due diligence, and creating more value across that ecosystem,” said Diop, who was a judge at last year’s Startup Battlefield Africa.

To gain consideration for DNA investment, startups must gain referral by a member. DNA will take a minority stake (less than 10 percent) in ventures that receive seed funds and provide program mentorship until exits, according to Diop.

To become an angel, members must commit to investing a minimum of $10K a year (for those coming on as individuals), $20K (for corporates), and be on hand to support the portfolio startups, according to DNA’s Corporate Membership Charter.

The investor network is registered as commercial non-profit in Senegal and held its first meeting in Dakar this month. The inaugural 31 members include Facebook Network Investor Lead Ibrahim Ba, former AfriLabs head Tayo Akinyemi, and Timbuktu Capital Management investor Ousmane Diagne. Moustapha Ndiaye and Ibrahima Niang co-founded DNA with Diop. 

DNA aims to expand in investment size and scope in coming years. After building the angel network and its experience, DNA will look to invest in more mature companies. On a future fund size, “We’ve discussed $5 million as our first target,” said Diop.

Over the last decade, Africa’s tech ecosystem has seen a doubling and tripling of Africa focused VCs and investment to a growing cadre of startups across sectors spanning fintech, blockchain, agtech, and logistics.

This month e-commerce unicorn Jumia filed for an IPO on the New York Stock exchange, Africa’s first startup listing on a major exchange. The Pan-African e-commerce company operates multiple internet service verticals in 24 African countries, including 7 that are French speaking. Orange, the parent of Orange Digital Ventures (where DNA founder Marieme Diop is an associate), is an investor in Jumia.

Per its charter goals, acquisitions and IPOs are listed among the performance events Dakar Angels Network looks create around African startups in French speaking countries.

 

Looking for a better exit? Get out of the game early

VC investing is a game of putting money into a company and hopefully getting more out. In an ideal world, the value placed on a company at acquisition or initial public offering would be some large multiple of the amount of money its investors committed.

As it happens, that multiple on invested capital (MOIC) makes for a fairly decent heuristic for measuring company and investor performance. Most critically, it provides a handy metric to use for answering these questions: For US-based companies, have exit multiples changed in a meaningful way over time? And, if so, does this suggest something about the investment landscape overall?

Coming up with an answer to this question required a specific subset of funding and exit data from Crunchbase. If you’re interested in the how and why behind the data, check out the Data and Methodology section at the very end of the article. If not, we’ll cut right to the chase.

Exit multiples may be on the rise

A rather conservative analysis of Crunchbase data suggests that, over the past decade or so, exit multiples were on the rise before leveling off somewhat.

Below, you can see a chart depicting median MOIC for a set of U.S.-based companies with complete (as best we can tell) equity funding histories stretching back to Series A or earlier, which also have a known valuation at time of exit. That valuation is either the price paid by an acquirer or the value of the company at the time it went public. In an effort to reduce the impact of outliers, we only used companies with two or more recorded funding rounds. With that throat-clearing out of the way, here’s median MOIC over time:

It should be noted for the record that the shape of the above chart somewhat changes depending on the data is filtered. Including exit multiples for companies with only one reported funding round resulted in slightly higher median figures for each year and a more steady linear climb upward. But that’s probably due to the number of comically-high multiples some companies with single small rounds and large exit values produced. There are surely examples of companies that raised $1 million once and later sold for $100 million, but those are fewer and further between than companies with missing data from later rounds.

What might be driving the rise in exit multiples?

The rise in exit multiples may have to do with the fact that more companies are getting acquired at earlier stages.

Crunchbase data suggests that startups earlier in the funding cycle tend to deliver better exit multiples. In an effort to denoise the data a bit, we took the Crunchbase exit dataset and filtered out the companies that raised only one round. (Companies that raised only one round produced a lot of crazy outlier data points that skewed final results.)

This suggests that, in general, the earlier a startup is acquired in the funding cycle the more likely it is to deliver larger multiples on invested capital.

Now, granted, we’re working off of small sample sets with a fair amount of variability here, particularly for startups on opposite ends of the funding lifecycle. There is going to be some sampling bias here. Founders and investors are less likely to self-report disappointing numbers; therefore, these findings aren’t ironclad from the perspective of statistical significance.

But it’s a finding that nonetheless echoes a prior Crunchbase News analysis, which found a slight but statistically significant inverse relationship between the amount of capital a startup raises and the multiple its exit delivers to investors and other stakeholders. In other words, startups that raise less money (such as those at seed and early-stage) tend to deliver better multiples on invested capital.

The changing population of companies finding exits

So does the tendency for earlier-stage companies to deliver better investment multiples have anything to do with upward movement in MOIC ratios? It could, particularly if more seed and early-stage startups are headed to the exit these days. And as it turns out, our data suggest that’s happening.

The chart below shows the breakdown of exits for venture-backed companies based on the last stage of funding the company raised prior to being acquired or going public. We show a decade’s worth of funding data, this time including all exits from U.S. companies with known venture funding histories since seed or early stage—some 5,275 liquidity events in all. For 2018, we also include stats for exits through the beginning of May. Given reporting delays and the fact that there are still eight months left in the year, this is certainly subject to change.

Now, to be clear, over the past decade, there has been some notable growth in the overall number of exits for U.S.-based venture-backed companies across all stages.

But, in some ways, the raw number of deals doesn’t much matter. After all, figures from several years ago aren’t really actionable to founders and investors looking for an exit sometime this year. What matters, then, is what the mix of exits looks like, and at least for the set of companies we analyzed here, the past ten years brought an ultimately small but nonetheless notable shift in the mix of companies that get acquired or go public.

Seed and early-stage companies now make up a larger proportion of the population of exited companies now than in the past. And since companies at that stage tend to deliver higher multiples, it is likely responsible for part of the increase over time.

There are certainly other factors besides the influx of seed and early-stage ventures into the mix of exits, but sussing those out will require further investigation.

It should go without saying that any venture-backed company that gets acquired or goes public is a success, at least of some sort. After all, a tiny fraction of new businesses secure outside funding from angel investors or venture capitalists, and only a small proportion of those get acquired.

Any exit is better than none.

Data and methodology

Let’s start by saying that there is probably no canonically correct way to do this sort of analysis and that since Crunchbase News is working off of private company data, what hasn’t been aggregated programmatically is subject to self-reporting bias. Founders and investors are more likely to disclose exit valuations that make them look good, so this may skew our findings higher.

Definition of funding stages

Here, we use the same funding stage definitions as Crunchbase News does in its quarterly reporting.

  • Seed/Angel-stage deals include financings that are classified as a seed or angel, including accelerator fundings and equity crowdfunding below $5 million.
  • Early stage venture include financings that are classified as a Series A or B, venture rounds without a designated series that are below $15M, and equity crowdfunding above $5 million.
  • Late stage venture include financings that are classified as a Series C+ and venture rounds greater than $15M.
  • Technology Growth include private equity investments in companies that have previously raised venture capital rounds.

Building the base dataset

Here are the basic process we used:

  1. We started by aggregating pre-IPO venture funding raised by U.S.-based companies. We focused only on equity funding only (angel, seed, convertible notes, equity crowdfunding, Series A, Series B, etc.), and did not include debt financing, grants, product crowdfunding, or other non-equity funding events. We did include private equity rounds, if and only if PE was the terminal round and the company had raised a seed, angel, or VC round prior to raising PE.
  2. For each company, we recorded the stage of its first and last known funding rounds.
  3. We excluded any company whose first round was Series B or later.
  4. We excluded companies that were missing dollar amounts for any of their equity funding rounds.
  5. We then retrieved the valuations at acquisition or IPO for each of the companies, again excluding any companies for which terminal private market valuation was not known.
  6. Finally, for each company, we divided valuation at exit by the amount of known venture funding, resulting in the multiple on invested capital from equity financing events.

In conjunction with choosing to start with Series A and earlier funding events, we believe this produced a set of companies with reasonably complete funding histories. Granted, there are “unknown unknowns,” like later rounds that weren’t captured in Crunchbase, but there is no good way to control for those.

Q1 2018 global diversity investment report: Investing trends in female founders

In this report, we look at venture and seed investment trends in female-founded startups over the last five quarters. For this time period, we look at more than 9,119 venture deals and 6,802 seed deals for companies with founders associated.

To begin, $3.6 billion was invested in companies with at least one female founder in Q1 2018. That result was up 60 percent from Q1 2017’s $2.2 billion tally but down from Q4 2017 by 30 percent. We fully expect this amount to go up as more fundings are added for the quarter retroactively.

Overall, the money invested into companies with at least one female founder represents just nine percent of venture dollars invested in Q1 2018. That is one percentage point below Q1 2017’s 10 percent result. The second, third and fourth quarters of 2017 all presented higher percentages, as well: 14, 15 and 15 percent of venture dollars invested in those quarters, respectively.

When we narrow the criteria, however, the figures fall. In the Q1 2018, three percent of venture dollars were invested in solo female founders.

From a deal volume perspective, Q1 2018 saw 14 percent of venture deals include at least one female founder. That result mirrored the year-ago, Q1 2017 figure. However, in line with what we saw when looking at 2017’s dollar volume breakdown between teams with and without women, the interim quarters showed a higher deal count at 15 and 16 percent of all venture deals.

Deals of note

While the deal and dollar volume progress will disappoint many, inside the data are a host of interesting deals that we’d like to highlight. However, in the interest of space, we’ve selected three to share.

Here are the notable venture deals made in Q1 2018 with female founders that caught our eye:

  • Glossier: A New York-based direct to consumer beauty company founded by Emily Weiss. Glossier raised a $52 million Series C round. Index Venture and Institutional Venture Partners led the Series C round.
  • DataVisor: A Silicon Valley-based fraud prevention company led by two female founders, Yinglian Xie and Fang Yu. DataVisor raised a Series C round of $40 million. Sequoia Capital China led the round with previous investors NEA and GSR Ventures participating.
  • Zum: A provider of scheduled on-demand rides for parents of children for highly vetted drivers, founded by Ritu Narayan. Zum raised a $19 million Series B round from Spark Capital with previous investors Sequoia Capital and AngelPad participating.

Next, we’ll turn to who is cutting the checks. Or, more precisely, which firms are investing in companies with female founders.

Leading venture investors in female founders

Investors that represented the highest deal count in startups with at least one female founder include Sequoia Capital with seven investments and Omidyar Network with New Enterprise Associates at five each for Q1 2018.

But, of course, investors have different focuses, especially when it comes to startup maturity. So, to that end, we’ll break down investment into companies with female founders of one particular stage.

Seed investments in female founders

Seed-funded companies with at least one female founder raised $218 million in Q1 2018. This represented 18 percent of all seed dollar volume for the quarter, up from 15 percent in Q4 2017 and 17 percent in Q1 2017.

Overall, seed is a leading indicator for venture, and it has been growing year over year in absolute dollar terms and by percent since 2009 when we first started measuring these trends. That means that if the percentage of deals and dollars at the seed level that women are raising is going up, we may be able to expect more women-founded early, middle and late-stage companies to raise venture capital in time.

Here’s a look at the dollar volume of seed capital invested into companies with and without female founders:

Next here’s the same data in relative percentage terms.

Returning to the big picture, seed deal counts are down slightly quarter over quarter. As more than 59 percent of seed deal volume is reported after the end of a specific quarter, the count of seed deals will increase from what is listed below:

Again, we now want to know who was closing these deals with female founders.

Leading seed investors

Leading seed investors in companies with at least one female founder include Y Combinator with 28, SOSV with 10 and BBG Ventures and Innovation Works at five investments each.

Investing in diverse founders

Kapor CapitalBackstage CapitalBBG VenturesBroadway AngelsPipeline Angels and more have been leading the charge to invest in diverse founders. With the increase in the number of female founders in the last five years, pressure has been growing on the broader venture capital community. With 74 percent of the top 100 firms with no female investing partners, bringing women and minorities both into their ranks and into their investment portfolios is a goal.

All Raise sets new goals for investing in diverse founders

AllRaise.org, which launched this past week, led by prominent female venture investors, seeks to impact these numbers. The organization has set the goal within the U.S. for the percent of female investing partners to double from 9 percent to 18 percent within 10 years or by 2028.

Why 10 years? For the venture industry that’s the typical life term of a single fund. Venture is a cottage industry with partners typically committing to stay for the lifetime of one or more funds. Therefore, turnover at the partner level tends to be much slower than other industries. With funds raising ever-larger amounts, and more often, expanding teams provides an opportunity to bring on diverse candidates. According to All Raise, the fastest growth for female partners is not with existing firms, but with new funds.

In the next five years, All Raise would like to see venture investments in female-founded companies move up from 15 percent to 25 percent. The organization is leading efforts to impact these numbers directly with Female Founder Office Hours supporting women who are seeking funding, to having tech founders and CEOs commit to increasing diversity in their team, board and investors.

Crunchbase is partnering with All Raise to keep abreast of these numbers within the U.S. market. For venture investments in female founders, we have a ways to go to get to 25 percent within the next five years. Reviewing the data over the last 10 years, 2015 is the first year that companies with at least one female founder have broken through the threshold of 10 percent of venture dollars. 2017 represents the best full year to date, at 14 percent of venture dollars.

The U.S. market mirrors this percent. We would need to see an average of two percentage growth points each year to reach this goal. With the number of female-founded companies growing slowly each year, these numbers are a stretch; however, it may still be attainable.

What did VCs study in college?

Although some colleges may offer a major program in business or entrepreneurship, there isn’t exactly a major in venture capital or angel investment.

Crunchbase News has already examined where professional VCs and angel investors went to college (yes, there’s some truth to the Harvard and Stanford stereotypes) and when having an MBA matters in the world of entrepreneurial finance. But we haven’t yet looked at one facet of startup investors’ educational backgrounds: what they studied in college. So that’s what we’re going to dive into today.

To accomplish this, we’re going to use the educational histories from nearly 5,000 VC American and Canadian investment partners (e.g. folks who are employed by and invest on behalf of a venture capital firm) and nearly 8,500 angel investors in Crunchbase. For those with undergraduate degrees (e.g. B.S., B.A., A.B., and all manner of other variations) and majors listed, we then categorized majors into broader fields of study.1

In the chart below, you’ll see a breakdown of professional VCs’ college degrees.

Because startup investors are ostensibly focused on technology companies, the fact that most professional venture capitalists have a background in engineering (electrical, mechanical and industrial engineering mostly, but there are some more niche areas like nuclear engineering represented here) or technical subjects (like information systems and materials science) is predictable.

What might be most interesting here is just how few investment partners majored in formal sciences like math or computer science, ranking lower than the humanities by just a hair.

However, this is not the case with angel investors. The chart below displays the breakdown of college degrees for U.S. and Canadian angel investors. It keeps the same color coding as the chart for VCs’ degrees.

Among individual angel investors who are unaffiliated with a venture capital firm, a background in math and computer sciences is more likely.

There are a number of other fun facts to be found in the data:

  • For both professional VCs and angel investors who studied in the social sciences, economics majors vastly outnumber other disciplines like political science, sociology and psychology.
  • Finance, somewhat unsurprisingly, was the most popular subject for investment partners who majored in a business-related field. Undergraduate degrees in marketing and business administration were also common.
  • A lot of angel investors studied entrepreneurship as undergrads, whereas comparatively few professional VCs formally studied the subject.
  • History was, by far, the most popular subject area in the humanities for both angels and venture capitalists.

So what does all of this tell us? At least by our reading, the academic backgrounds of startup investors is quite diverse. And this would make sense. There isn’t a clear career path to becoming a venture capitalist or to having enough money and enthusiasm to make angel investments.

Our first-blush analysis also suggests that folks who studied computer science, mathematics and statistics are potentially under-represented among professional venture capital investors. Considering that many of the startups in which VCs invest are built around a new computing technology on the software or hardware side, this is a rather weird and inexplicable irony.

If you find yourself in college and want to invest in startups someday, either as a professional VC or as an angel investor, study what you want. There’s going to be a lot of other factors besides your undergraduate major that will land you a position in the field.

Footnotes:

  1. Biology, chemistry and geology degrees are more broadly categorized as “natural sciences.” Math and computer science are “formal sciences.” Political science, economics, psychology and sociology are part of the “social sciences” field.

Late-blooming startups can still thrive

It seems like startup news is full of overnight success stories and sudden failures, like the scooter rental company that went from zero to a $300 million valuation in months or the blood-testing unicorn that went from billions to nearly naught.

But what about those other companies that mature more gradually? Is there such a thing as slow and successful in startup-land?

To contemplate that question, Crunchbase News set out to assemble a data set of top late-blooming startups. We looked at companies that were founded in or before 2010 that raised large amounts of capital after 2015, and we also looked at companies founded a least five years ago that raised large early-stage funds in the last year. (For more details on the rules we used to select the companies, check “Data Methods” at the end of the post.)

The exercise was a counterpoint to a data set we did a couple of weeks ago, looking at characteristics of the fastest growing startups by capital raised. For that list, we found plenty of similarities between members, including a preponderance of companies in a few hot sectors, many famous founders and a lot of cancer drug developers.

For the late bloomers, however, patterns were harder to pinpoint. The breakdown wasn’t too different from venture-backed companies overall. Slower-growing companies could come from major venture hubs as well as cities with smaller startup ecosystems. They could be in biotech, medical devices, mobile gaming or even meditation.

What we did find, however, was an interesting and inspiring collection of stories for those of us who’ve been toiling away at something for a long time, with hopes still of striking it big.

Pivots and patience

Even youthful startups have been known to make a major pivot or two. So it’s not surprising to see a lot of pivots among late bloomers that have had more time to tinker with their business models.

One that fits this mold is Headspace, provider of a popular meditation app. The company, founded in 2010 by a British-born Buddhist monk with a degree in circus arts, started as a meditation-focused events startup. But it turned out people wanted to build on their learning on their own time, so Headspace put together some online lessons. Today, Santa Monica-based Headspace has millions of users and has raised $75 million in venture funding.

For late bloomers, the pivot can mean going from a model with limited scalability to one that can attract a much wider audience. That’s the case with Headspace, which would have been limited in its events business to those who could physically show up. Its online model, with instant, global reach, turns the business into something venture investors can line up behind.

Sometimes your sector becomes hip

They say if you wait long enough, everything comes back in style. That mantra usually works as an excuse for hoarding ’80s clothes in the attic. But it also can apply to entrepreneurial companies, which may have launched years before their industry evolved into something venture investors were competing to back.

Take Vacasa, the vacation rental management provider. The company has been around since 2009, but it began raising VC just a couple of years ago amid a broad expansion of its staff and property portfolio. The Portland-based company has raised more than $140 million to date, all of it after 2016, and most in a $103 million October round led by technology growth investor Riverwood Capital.

CloudCraze, which was acquired by Salesforce earlier this week, also took a long time to take venture funding. The Chicago-based provider of business-to-business e-commerce software launched in 2009, but closed its first VC round in 2015, according to Crunchbase records. Prior to the acquisition, the company raised about $30 million, with most of that coming in just a year ago.

Meanwhile, some late bloomers have always been fashionable, just not necessarily as VC-funded companies. Untuckit, a clothing retailer that specializes in button-down shirts that look good untucked, had been building up its business since 2011, but closed its first venture round, a Series A led by VC firm Kleiner Perkins, last June.

Slow-growing venture-backed startups are still not that common

So yes, there is still capital available for those who wait. However, the truth of the matter is most companies that raise substantial sums of venture capital secure their initial seed rounds within a couple years of founding. Companies that chug along for five-plus years without a round and then scale up are comparatively rare.

That said, our data set, which looks at venture and seed funding, does not come close to capturing the full ecosystem of slow-growing startups. For one, many successful bootstrapped companies could raise venture funding but choose not to. And those who do eventually decide to take investment may look at other sources, like private equity, bank financing or even an IPO.

Additionally, the landscape is full of slow-growing startups that do make it, just not in a venture home run exit kind of way. Many stay local, thriving in the places they know best.

On the flip side, companies that wait a long time to take VC funding have also produced some really big exits.

Take Atlassian, the provider of workplace collaboration tools. Founded in 2002, the Australian company waited eight years to take its first VC financing, despite plentiful offers. It went public two years ago, and currently has a market valuation of nearly $14 billion.

The moral: Those who take it slow can still finish ahead.

Data methods

We primarily looked at companies founded in 2010 or earlier in the U.S. and Canada that raised a seed, Series A or Series B round sometime after the beginning of last year, and included some that first raised rounds in 2015 or later and went on to substantial fundraises. We also looked at companies founded in 2012 or earlier that raised a seed or Series A round after the beginning of last year and have raised $30 million or more to date. The list was culled further from there.